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2020 (3) TMI 628 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - disallowance of expenses incurred in relation to earning of an exempt income - Addition under the normal provisions and also corresponding additions made to Book Profit by invoking provisions of Sec.115JB for computing book profit for levying minimum alternate tax - HELD THAT - Assessee has brought on record cogent material to evidence that assessee has own interest free funds available to the tune of ₹ 19.75 as on 31.03.2014 consisting of share capital along with Reserves and Surpluses ( preceding year 11.71 crores) and the assessee had investments of ₹ 8.34 Crs. as on 31.03.2014 while investments were to the tune of ₹ 34.19 lakhs as on 31.03.2013 - as observed that assessee has sold an property for ₹ 9.35 crores during the year under consideration. The assessee has filed bank statements and sale deed to evidence sale of property and investments made during the year under consideration. Allegations made by Revenue are that the assessee has used mixed funds for the purpose of making investments in the securities which are capable of yielding exempt income. Revenue could not demonstrate co-relation between the utilization of interest bearing borrowed funds with the investments made. Major investments were made during the year under consideration and assessee had also sold its property for consideration of ₹ 9.35 crores during the year under consideration. Assessee has demonstrated with cogent evidences that the assessee has its own interest free funds which are higher than investments and presumption will apply that assessee has invested its own interest free funds for making investments in the securities capable of yielding exempt income. The Revenue is not able to demolish/rebut the aforesaid presumption. The Reliance is placed on decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT . Thus, we have no hesitation in ordering deletion of additions as were made by Revenue u/s 14A read with Rule 8D(2)(ii) of the 1962 Rules. So far as additions as were made by Revenue u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules which are vehemently challenged by assessee assessee has to bring on record cogent evidences and explanations to substantiate the complete modus operandi adopted by the assessee for making investments such as involvement of Board of Directors, committee of investments /Personnel appointed to look after decision making process for investments, time spent by Board of Directors/ committee members or other personnel and cost attributable thereof , other cost incurred such as administrative costs and other costs in relation to these investments, etc., to explain and demonstrate entire cycle of investment making process to discharge primary onus, then the AO has to look into books of accounts to compute the disallowance of expenditure incurred in relation to earning of an exempt income and to record satisfaction. In the absence thereof of the discharge of primary onus by the assessee as aforesaid, the AO will have right to invoke Rule 8D(2)(iii) of the 1962 Rules after recording satisfaction as mandated u/s 14A. Matter is remitted back to the file of the AO for fresh adjudication and the assessee is directed to produce relevant details /explanation and modus operandi of managing its investment portfolio as detailed above by us in this order. We agree with the contentions of the assessee that Section 14A read with Rule 8D(2) of the 1962 Rules cannot be invoked for making disallowance u/s 115JB but disallowance of expenses incurred relatable to earning of an exempt income is to be computed in accordance with Explanation 1(f) to Section 115JB of the 1961 Act, in accordance with ratio of decision of Special Bench in the case of Vireet Investment 2017 (6) TMI 1124 - ITAT DELHI . We also remit this matter back to the file of the AO for making additions to the Book Profit u/s.115JB in accordance with decision of the Hon ble Special Bench of the tribunal in the case of Vireet Investment (P) Limited (supra) read with explanation 1(f) to Section 115JB.
Issues Involved:
1. Sustaining the addition under Section 14A related to dividend income. 2. Disallowance of interest expenses under Section 14A read with Rule 8D(2)(ii). 3. Disallowance of administrative expenses under Section 14A read with Rule 8D(2)(iii). 4. Addition to Book Profits under Section 115JB in relation to Section 14A disallowance. Detailed Analysis: 1. Sustaining the Addition under Section 14A Related to Dividend Income: The assessee contested the addition of ?36,38,000 under Section 14A, arguing that the investments were funded entirely by the company's own funds, not borrowed funds. The CIT(A) upheld the AO's decision, which the assessee challenged, claiming it was contrary to facts and based on erroneous presumptions. The assessee provided financial statements and details of the source of funding, demonstrating no borrowing was used for the investments. 2. Disallowance of Interest Expenses under Section 14A Read with Rule 8D(2)(ii): The AO invoked Section 14A read with Rule 8D(2)(ii) to disallow ?34.21 lakhs of interest expenses, presuming mixed use of interest-bearing funds. The assessee argued that it had sufficient own funds (?19.75 crores) to cover the investments (?8.34 crores), and thus, the presumption should be that own funds were used. The assessee also sold land for ?9.35 crores during the year, which was used for investments. The Tribunal agreed with the assessee, noting that the Revenue couldn't demonstrate a direct correlation between borrowed funds and investments. The Tribunal ordered the deletion of the interest expense disallowance. 3. Disallowance of Administrative Expenses under Section 14A Read with Rule 8D(2)(iii): The AO also disallowed ?2.17 lakhs as administrative expenses under Section 14A read with Rule 8D(2)(iii). The Tribunal noted that the assessee needed to provide detailed explanations and evidence regarding the investment decision-making process, including the involvement of the Board of Directors, committees, and associated costs. The Tribunal remitted the matter back to the AO for fresh adjudication, directing the assessee to produce relevant details to substantiate its claims. 4. Addition to Book Profits under Section 115JB in Relation to Section 14A Disallowance: The AO included the disallowed expenses in the computation of Book Profits under Section 115JB. The assessee argued that Section 14A read with Rule 8D(2) should not apply to Section 115JB, citing the Special Bench decision in Vireet Investment (P) Limited. The Tribunal agreed, stating that disallowance under Section 115JB should be computed according to Explanation 1(f) to Section 115JB, in line with the Vireet Investment decision. The matter was remitted back to the AO for fresh computation of Book Profits. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, ordering the deletion of the interest expense disallowance under Section 14A read with Rule 8D(2)(ii) and remitting the issues of administrative expense disallowance and Book Profit computation back to the AO for fresh adjudication. The Tribunal emphasized the need for the assessee to provide detailed evidence regarding the investment decision-making process and the proper application of Section 115JB in line with judicial precedents.
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